The gamble of failing on greening the Latin American financial system

By José Luis Reséndiz
Latin America Analyst

 The sustainable economic recovery in Latin America is a challenge that leaders may regret not to take up seriously and on time. Unfortunately, the violence and inequality crises from the last decades have led to the wrong perception that the pandemic is just a transitory issue. The region is facing a storm in which many of its leaders do not feel responsible for their actions, and citizens are much more concern about unemployment or hunger. Under such circumstances, what is the role of sustainable finance in Latin America during the pandemic?

In its Meditations, Rousseau argues that adversity teaches us lessons that come to our minds quite late, just after they might be useful. There is a risk that one of those lessons for Latin America would be the use of sustainable finance to promote a sustainable economic recovery or a “build back better” strategy. Accordingly, sustainable finance should be understood as an approach that incorporates climate, green and social finance while also adding broader considerations concerning the longer-term economic sustainability.[1]

In developed markets, the finance industry seems to have passed a turning point towards a net-zero economy. The growing interest to include environmental, social and governance (ESG) considerations on investments demonstrate how sustainability can generate financial value. Ultimately, it is the only way humanity (and capitalism) can survive. The UN’s Intergovernmental Panel on Climate Change has been precise: we need to cut annual global emissions by half in the next years and hit net zero carbon by the middle of the century.

It is expected that Latin America will experience a 9% fall in GDP, which will not only trigger an economic downturn but also a rise in poverty for approximately four million inhabitants, most of them being indigenous and afro-descendants.[2] To address these upcoming issues, governments must stop tweaking the edges of their traditional approaches. Instead, they should embrace a new way to mobilise public and private investments in which the environmental and social matters should be the centre.

The banking industry’s sustainable finance products are concentrated in five countries –Brazil, Colombia, Argentina, Mexico and Ecuador – due to regulatory and government support. [3] Brazil has become the leader in providing debt instruments linked with ESG considerations. Mexico has recently shown a strong signal to promote a green recovery by issuing its first sovereign sustainable bond in the middle of the pandemic. However, the issuance raised concerns about the lack of enforcement mechanisms, which may lead to greenwashing practices.[4] Even though there is a growing interest on green bonds in Latin America, they accounted for just 2% of the global green bond market in 2019, mainly focused on renewable energy, transport and land use.[5]

Approximately USD 77 billion are needed to meet Latin America’s 2030 climate change goals.[6] Public investment can cover only about a quarter, while private investors should be incentivised to fill the rest. Even though there is strong evidence that the right track is to follow a sustainable finance approach in the upcoming years, it is still unclear how Latin America will move forward to support the recent signals of progress.[7] To remove this uncertainty, governments and businesses in the region should follow a credible sustainable trajectory guided by net zero pledges with science-based targets.

References:

[1] International Capital Market Association. 2018. Sustainable Finance, High-level Definitions. bit.ly/2K2k323.

[2] Economic Commission for Latin America and the Caribbean. 2020. Estudio Económico

de América Latina y el Caribe Principales condicionantes de las políticas fiscal y monetaria en la era pospandemia de COVID-19. bit.ly/2Wk65ep.

[3] Juan Camilo Mejia-Escobar, Juan David González-Ruiz, and Eduardo Duque-Grisales. 2020. “Sustainable Financial Products in the Latin America Banking Industry: Current Status and Insights”. Sustainability 12(14). bit.ly/38bN8zZ.

[4] Justin Villamil. 2020. Mexico’s ESG Bond Has Skeptics Questioning Do-Good Bona Fides. Bloomberg.  bloom.bg/2WpFblj.

[5] Climate Bonds Initiative. 2019. Latin America & Caribbean Green finance state of the market 2019. bit.ly/2LJ6MvI.

[6] Luis Alberto Moreno. 2020. How green investment will help Latin America and the world fight climate change. bit.ly/3ahVzfR.

[7] Carlos Alberto Vargas, Andrés Guerrero Alvarado, Angélica Rotondaro and Vicente José Servigón Caballero. 2020. In Latin America, Impact Finance Demonstrates Remarkable Progress and Untapped Potential. Stanford Social Innovation Review. bit.ly/3r1nHd0.

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